What changed in this filing

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Item 1. Financial Statements

2021-05-05 compared with 2020-11-05 · 143 added, 249 removed, 296 unchanged (57% of the section changed)

4 unchanged sentences

Dollars, except share and per share amounts)

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Current assets:

4 unchanged sentences

Total current assets 137,341 127,704

Property and equipment, net of accumulated depreciation of $ 7,133 (December 31, 2019:

Property and equipment, net of accumulated depreciation of $ 8,063

(December 31, 2020:

Right of use asset 2,315 2,405

33 unchanged sentences

Dollars, except share and per share amounts)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Collaborations and licenses $ 1,154 $ 835

4 unchanged sentences

General and administrative 3,847 3,553

Depreciation and amortization 490 507 1,491 1,521

Depreciation 443 500

Change in fair value of contingent consideration 129 112

Site consolidation — 57

Impairment of intangible assets — 43,836 — 43,836

Impairment of goodwill — 22,471 — 22,471

Arbitration — 6,486 — 6,486

Total operating expenses 17,789 14,638

4 unchanged sentences

Foreign exchange gain (loss) 28 ( 18 )

Equity investment loss ( 2,545 ) ( 3,512 ) ( 2,545 ) ( 11,497 )

Total other loss ( 705 ) ( 714 )

Loss before income taxes ( 16,381 ) ( 13,861 )

Income tax benefit — 12,656 — 12,656

Net loss ( 16,381 ) ( 13,861 )

8 unchanged sentences

Unrealized gain on available-for-sale securities $ 3 $ 251

Currency translation adjustments 44 27 44 ( 47 )

Comprehensive loss $ ( 16,378 ) $ ( 13,610 )

10 unchanged sentences

Certain fair value adjustments to liability stock option awards — — — — 40 — — 40

Issuance of common shares pursuant to the Open Market Sales Agreement — — 4,147,081 12,315 — — — 12,315

Issuance of common shares pursuant to the Open Market Sale Agreement — — 6,395,780 26,419 — — — 26,419

Issuance of common shares pursuant to exercise of options — — 65,952 335 ( 127 ) — — 208

Issuance of common shares pursuant to ESPP — — 104,917 425 ( 178 ) — — 247

Unrealized gain on available-for-sale securities — — — — — — 3 3

1 unchanged sentence

Balance March 31, 2021 1,164,000 $ 152,620 96,245,371 $ 1,013,118 $ 62,133 $ ( 1,065,554 ) $ ( 48,168 ) $ 114,149

Accretion of accumulated dividends on Preferred Shares — 2,995 — — — ( 2,995 ) — —

Stock-based compensation — — — — 1,597 — — 1,597

Certain fair value adjustments to liability stock option awards — — — — ( 92 ) — — ( 92 )

Issuance of common shares pursuant to the Open Market Sales Agreement — — 2,291,184 5,045 — — — 5,045

Issuance of common shares pursuant to exercise of options — — 4,000 ( 78 ) ( 8 ) — — ( 86 )

Unrealized gain on available-for-sale securities — — — — — — ( 122 ) ( 122 )

Net loss — — — — — ( 14,087 ) — ( 14,087 )

Balance June 30, 2020 1,164,000 $ 143,258 71,256,579 $ 916,066 $ 58,300 $ ( 1,004,014 ) $ ( 48,099 ) $ 65,511

Accretion of accumulated dividends on Preferred Shares — 3,027 — — — ( 3,027 ) — —

Stock-based compensation — — — — 1,658 — — 1,658

Certain fair value adjustments to liability stock option awards — — — — ( 137 ) — — ( 137 )

Issuance of common shares pursuant to the Open Market Sales Agreement — — 13,258,096 48,760 — — — 48,760

Issuance of common shares pursuant to exercise of options — — 103,900 543 ( 207 ) — — 336

Unrealized gain on available-for-sale securities — — — — — — ( 72 ) ( 72 )

Currency translation adjustments — — — — — — 44 44

Net loss — — — — — ( 18,755 ) — ( 18,755 )

Balance September 30, 2020 1,164,000 $ 146,285 84,618,575 $ 965,369 $ 59,614 $ ( 1,025,796 ) $ ( 48,127 ) $ 97,345

See accompanying notes to the condensed consolidated financial statements.

ARBUTUS BIOPHARMA CORPORATION

Condensed Consolidated Statement of Stockholders’ Equity

(In thousands of U.S.

Dollars, except share and per share amounts)

Convertible Preferred Shares Common Shares

4 unchanged sentences

Certain fair value adjustments to liability stock option awards — — — — 180 — — 180

Issuance of common shares pursuant to the Open Market Sales Agreement — — 614,401 2,248 — — — 2,248

Issuance of common shares pursuant to the Open Market Sale Agreement — — 4,147,081 12,315 — — — 12,315

Issuance of common shares pursuant to exercise of options — — 34,000 249 ( 83 ) — — 166

Currency translation adjustment — — — — — — ( 22 ) ( 22 )

Unrealized gain on available-for-sale securities — — — — — — 252 252

Net loss — — — — — ( 13,861 ) — ( 13,861 )

Balance March 31, 2020 1,164,000 $ 140,263 68,961,395 $ 911,099 $ 56,803 $ ( 986,932 ) $ ( 47,977 ) $ 73,256

Accretion of accumulated dividends on Preferred Shares — 2,762 — — — ( 2,762 ) — —

Stock-based compensation — — — — 3,915 — — 3,915

Certain fair value adjustments to liability stock option awards — — — — 230 — — 230

Issuance of common shares pursuant to the Open Market Sales Agreement — — 593,689 2,477 — — — 2,477

Issuance of common shares pursuant to exercise of options — — 679 3 ( 1 ) — — 2

Currency translation adjustment — — — — — — ( 52 ) ( 52 )

Net loss — — — — — ( 23,315 ) — ( 23,315 )

Balance June 30, 2019 1,164,000 $ 131,613 56,850,172 $ 884,623 $ 53,738 $ ( 857,264 ) $ ( 48,244 ) $ 164,466

Accretion of accumulated dividends on Preferred Shares — 2,792 — — — ( 2,792 ) — —

Stock-based compensation — — — — 1,592 — — 1,592

Certain fair value adjustments to liability stock option awards — — — — 55 — — 55

Currency translation adjustment — — — — — — 27 27

Net loss — — — — — ( 82,503 ) — ( 82,503 )

Balance September 30, 2019 1,164,000 $ 134,405 56,850,172 $ 884,623 $ 55,385 $ ( 942,559 ) $ ( 48,217 ) $ 83,637

See accompanying notes to the condensed consolidated financial statements.

2 unchanged sentences

(In thousands of U.S.

Nine Months Ended September 30,

Three Months Ended March 31,

OPERATING ACTIVITIES

1 unchanged sentence

Non-cash items:

Deferred income tax benefit — ( 12,661 ) 1

Depreciation 443 500

Gain on sale of property and equipment — ( 11 )

Stock-based compensation expense 1,635 1,445

1 unchanged sentence

Change in fair value of contingent consideration 129 112

Impairment of intangible assets — 43,836

Impairment of goodwill — 22,471

Net equity investment loss 2,544 11,497

Non-cash royalty revenue ( 959 ) ( 656 )

5 unchanged sentences

Accounts payable and accrued liabilities ( 2,796 ) ( 3,602 )

Restructuring accrual ( 137 ) ( 917 )

Other liabilities ( 116 ) ( 131 )

3 unchanged sentences

Disposition of investments 20,350 21,968

Investment in Genevant ( 2,500 ) —

Proceeds from sale of property and equipment — 11

Acquisition of property and equipment ( 99 ) —

Net cash provided by investing activities 35,067 87,160

Net cash provided (used) by investing activities 18,221 ( 2,401 )

FINANCING ACTIVITIES

Proceeds from sale of future royalties, net — 18,549

Issuance of common shares pursuant to the Open Market Sale agreement 26,419 12,315

Issuance of common shares pursuant to exercise of options 208 166

Issuance of common shares pursuant to ESPP 247 —

Net cash provided by financing activities 26,874 12,481

Effect of foreign exchange rate changes on cash and cash equivalents ( 44 ) ( 10 )

Increase in cash and cash equivalents 65,119 53,140

Increase (decrease) in cash and cash equivalents 27,170 ( 5,383 )

Cash and cash equivalents, beginning of period 52,251 31,799

8 unchanged sentences

Nature of business and future operations

Description of the Business

Arbutus Biopharma Corporation (the “Company” or “Arbutus”) is a clinical-stage, biopharmaceutical company primarily focused on developing a cure for people with chronic hepatitis B virus (“HBV”) infection.

The Company is advancing multiple drug product candidates that may be combined into a potentially curative regimen for chronic HBV infection.

Arbutus has also initiated a drug discovery and development effort for treating coronaviruses, including COVID-19.

The Company’s pipeline includes:

• AB-729, a subcutaneously-delivered RNA interference (“RNAi”) product candidate currently in a Phase 1a/1b clinical trial.

Preliminary positive safety data in single-dose cohorts of healthy subjects and safety and efficacy data in the 60 mg and 180 mg single-dose cohorts in subjects with chronic HBV infection were reported in March 2020 and additional follow-on week 12 data for the 60 mg single-dose cohort were reported in May 2020.

Week 12 data for the 90 mg single-dose cohort were reported in September 2020.

The Company is dosing two 60 mg multi-dose cohorts of subjects with chronic HBV infection with dosing intervals of every four and eight weeks, respectively.

Results from the 60 mg multi-dose cohort with a dosing interval of every four weeks and additional follow-up data on the 60 mg and 90 mg single-dose cohorts are expected to be disclosed as part of an oral presentation at the upcoming American Association for the Study of Liver Disease Conference (“AASLD”) in November.

Separately, results from the 60 mg multi-dose cohort with a dosing interval of every eight weeks and a 90 mg single-dose cohort in HBV positive subjects are expected in the fourth quarter of 2020.

Additionally, the Company is dosing two 90 mg multi-dose cohorts with chronic HBV infection with dosing intervals of every eight and twelve weeks, respectively;

• AB-836, a next-generation capsid inhibitor product candidate currently advancing through CTA/IND-enabling studies, which the Company expects to be completed by the end of 2020;

• other compounds early in the development process, including oral compounds that inhibit PD-L1 and a next-generation oral HBV RNA destabilizer.

The Company’s research and development activities and the commercialization of its products are dependent on its ability to successfully obtain adequate financing through a combination of financing activities and operations.

The success of the Company is dependent on progressing its pipeline and subsequently obtaining the necessary regulatory approvals to bring its products to market and achieving profitable operations.

It is not possible to predict either the outcome of the Company’s existing or future research and development programs or the Company’s ability to continue to fund these programs in the future, nor to predict whether it will be successful in obtaining the necessary regulatory approvals to bring its products to market.

The Company is advancing multiple product candidates with distinct mechanisms of action that it believes have the potential to provide a new curative regimen for chronic HBV infection.

The Company has also initiated a drug discovery and development effort for treating coronaviruses, including COVID-19.

The Company’s two lead product candidates are AB-729, the Company’s proprietary subcutaneously-delivered RNA interference (“RNAi”) product candidate that suppresses HBsAg expression, and AB-836, the Company’s proprietary next-generation oral capsid inhibitor that suppresses HBV DNA replication.

AB-729 is currently in an ongoing Phase 1a/1b clinical trial and a Phase 2 clinical trial in collaboration with Assembly Biosciences, Inc.

(“Assembly”).

The Company initiated a Phase 1a/1b clinical trial for AB-836 in the first quarter of 2021 with initial data expected in the second half of 2021.

At March 31, 2021, the Company had an aggregate of $ 132.0 million in cash, cash equivalents and investments in marketable securities.

The Company believes that these cash resources will be sufficient to fund its operations through the third quarter of 2022.

The success of the Company is dependent on obtaining the necessary regulatory approvals to bring its products to market and achieve profitable operations.

The Company’s research and development activities and the commercialization of its products are dependent on its ability to successfully complete these activities and to obtain adequate financing through a combination of financing activities and operations.

It is not possible to predict either the outcome of the Company’s existing or future research and development programs or the Company’s ability to continue to fund these programs in the future.

COVID-19 Impact

In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) was identified in Wuhan, China.

The virus continues to spread globally, has been declared a pandemic by the World Health Organization and has spread to nearly every country in the world.

The impact of the pandemic has been, and will likely continue to be, extensive in many aspects of society.

This virus continues to spread globally, has been declared a pandemic by the World Health Organization and has spread to nearly every country in the world.

The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society.

The pandemic has resulted in and will likely continue to result in significant disruptions to businesses.

A number of countries and other jurisdictions around the world have implemented extreme measures in an attempt to slow the spread of the virus.

A number of countries and other jurisdictions around the world have implemented extreme measures to try and slow the spread of the virus.

These measures include the closing of businesses and requiring people to stay in their homes, the latter of which raises uncertainty regarding the ability to travel to hospitals in order to participate in clinical trials.

Additional measures that have had, and will likely continue to have, a major impact on clinical development, at least in the near-term, include shortages and delays in the supply chain, and prohibitions in certain countries on enrolling subjects in new clinical trials.

Despite the challenges of COVID-19, the Company has not had to alter its objectives for 2020.

However, future disruptions related to the COVID-19

pandemic could negatively impact the Company’s plans and timelines, including enrolling and monitoring subjects in the Company’s clinical trials.

While Arbutus’ core mission is to find a cure for hepatitis B, the magnitude of the coronavirus pandemic is undeniable.

Given the Company’s proven expertise in the discovery of new antiviral therapies, Arbutus feels compelled to work towards the discovery of a new treatment.

To that end, the Company has assembled an internal team of expert scientists under the direction of Arbutus’ Chief Scientific Officer, Dr.

Michael Sofia, to identify novel small molecule therapies to treat COVID-19 and future coronavirus outbreaks.

Sofia, who was awarded the Lasker-DeBakey Award for his discovery of sofosbuvir, brings extensive antiviral drug discovery experience to this new program.

The Company has also joined the COVID R&D consortium to further support and expedite efforts to address the SARS-CoV-2 pandemic and any future coronavirus outbreaks.

At this time, Arbutus’ COVID-19 research program will focus on the discovery and development of new molecular entities that address specific viral targets including the nsp12 viral polymerase and the nsp5 viral protease.

The Company is actively screening multiple new oral molecular entities.

These targets are essential viral proteins which Arbutus has experience in targeting.

Additional measures that have had, and will likely continue to have, a major impact on clinical development, at least in the near-term, include shortages and delays in the supply chain, as well as prohibitions in certain countries on enrolling subjects in new clinical trials.

Future disruptions related to the COVID-19 pandemic could negatively impact the Company’s plans and timelines for the remainder of 2021 and beyond, including enrolling and monitoring subjects in its clinical trials.

Significant accounting policies

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These statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).

These unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments and reclassifications necessary to fairly present the Company’s financial position as of September 30, 2020, the Company’s results of operations for the three and nine months ended September 30, 2020 and the Company’s cash flows for the nine months ended September 30, 2020.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results for the full year.

These unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments and reclassifications necessary to fairly present the Company’s financial position as of March 31, 2021, the Company’s results of operations for the three months ended March 31, 2021 and the Company’s cash flows for the three months ended March 31, 2021.

Such adjustments are of a normal recurring nature.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results for the full year.

These unaudited condensed consolidated financial statements follow the same significant accounting policies as those described in the notes to the audited consolidated financial statements of the Company for the year ended December 31, 2020, except as described below under Recent Accounting Pronouncements.

Principles of consolidation

These unaudited condensed consolidated financial statements include the accounts of the Company and its two wholly-owned subsidiaries, Arbutus Biopharma Inc.

(“Arbutus Inc.”) and Arbutus Biopharma US Holdings, Inc.

All intercompany transactions and balances have been eliminated in consolidation.

These unaudited condensed consolidated financial statements include the accounts of the Company and its one wholly-owned subsidiary, Arbutus Biopharma Inc.

(“Arbutus Inc.”).

All intercompany transactions and balances have been eliminated.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Net loss attributable to common shareholders per share

The Company follows the two-class method when computing net loss attributable to common shareholders per share as the Company has issued Series A participating convertible preferred shares (the “Preferred Shares”), as further described in note 11, that meet the definition of participating securities.

The Preferred Shares entitle the holders to participate in dividends but do not require the holders to participate in losses of the Company.

Accordingly, if the Company reports a net loss attributable to holders of the Company’s common shares, net losses are not allocated to holders of the Preferred Shares.

The Company follows the two-class method when computing net loss attributable to common shareholders per share as the Company has issued Series A participating convertible preferred shares (“Preferred Shares”), as further described in note 10.

The Company’s Preferred Shares are participating securities, as they entitle the holders to participate in dividends.

However, the Company’s Preferred Shares do not require the holders to participate in losses of the Company and accordingly, if the Company reports a net loss attributable to holders of the Company’s common shares, net losses are not allocated to holders of the Preferred Shares.

Net loss attributable to common shareholders per share is calculated based on the weighted average number of common shares outstanding.

The calculation of diluted net loss attributable to common shareholders per share does not differ from the calculation of basic net loss attributable to common shareholders per share, as the effect of the Company’s dilutive potential common shares was anti-dilutive.

During the nine months ended September 30, 2020 and 2019, potential common shares of 31.6 million and 28.2 million, respectively, consisting of the “if-converted” number of Preferred Shares and outstanding stock and Employee Stock Purchase Plan (“ESPP”) options, were excluded from the calculation of diluted net loss per common share because their inclusion would be anti-dilutive.

Diluted net loss attributable to common shareholders per share does not differ from basic net loss attributable to common shareholders per share since the effect of the Company’s stock options and convertible preferred stock was anti-dilutive.

During the three months ended March 31, 2021 and 2020, potential common shares of 35.0 million and 30.4 million, respectively, consisting of the “if-converted” number of Preferred Shares and outstanding stock options, were excluded from the calculation of net loss per share because their inclusion would be anti-dilutive.

Revenue recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers (”ASC 606”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under a five-step model:

Accounting Standards Codification 606, Revenue From Contracts with Customers (“ASC 606”) requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under a five-step model:

(i) identify contract(s) with a customer;

(ii) identify the performance obligations

in the contract;

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

6 unchanged sentences

The consideration under the contract is then allocated between the distinct performance obligations based on their respective relative stand-alone selling prices.

The estimated stand-alone selling price of each deliverable reflects the Company’s best estimate of what the selling price would be if the deliverable was regularly sold on a stand-alone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market assessment approach if the selling price on a stand-alone basis is not available.

The estimated stand-alone selling price of each deliverable reflects the Company’s best estimate of what the selling price would be if the deliverable was

regularly sold on a stand-alone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market assessment approach if the selling price on a stand-alone basis is not available.

The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to the customer for the related goods or services.

4 unchanged sentences

Recent accounting pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date.

Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-13, Financial Instruments - Credit Losses:

2 unchanged sentences

The Company is currently evaluating the impact of the new standard on its consolidated financial statements.

Fair value of financial instruments

Fair value measurements

The Company measures certain financial instruments and other items at fair value.

10 unchanged sentences

Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The carrying values of cash and cash equivalents, investments in marketable securities, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the immediate or short-term maturity of these financial instruments.

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the immediate or short-term maturity of these financial instruments.

To determine the fair value of the contingent consideration (note 8), the Company uses a probability weighted assessment of the likelihood the milestones would be met and the estimated timing of such payments, and then the potential contingent payments were discounted to their present value using a probability adjusted discount rate that reflects the early stage nature of the development program, time to complete the program development, and overall biotech indices.

The Company determined the fair value of the contingent consideration was $ 3.3 million as of September 30, 2020 and the increase of $ 0.3 million has been recorded as a component of total operating expenses in the statement of operations and comprehensive loss for the nine months ended September 30, 2020.

The Company determined the fair value of the contingent consideration was $ 3.6 million as of March 31, 2021 and the increase of $ 0.1 million has been recorded as a component of total operating expenses in the statement of operations and comprehensive loss for the three months ended March 31, 2021.

The assumptions used in the discounted cash flow model are level 3 inputs as defined above.

The Company assessed the sensitivity of the fair value measurement to changes in these unobservable inputs, and determined that changes within a reasonable range would not result in a materially different assessment of fair value.

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis, and indicates the level within the fair value hierarchy of the valuation techniques used to determine such fair value:

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques used to determine such fair value:

Level 1 Level 2 Level 3 Total

As of September 30, 2020 (in thousands)

As of March 31, 2021 (in thousands)

Cash and cash equivalents $ 79,421 $ — $ — $ 79,421

15 unchanged sentences

(in thousands)

Nine Months Ended September 30, 2020 $ 253 $ — $ 64 $ 317

Nine Months Ended September 30, 2019 $ 479 $ — $ ( 393 ) $ 86

Three Months Ended March 31, 2021 $ 250 $ — $ ( 52 ) $ 198

Three Months Ended March 31, 2020 $ 253 $ ( 9 ) $ ( 186 ) $ 58

The following table presents the changes in fair value of the Company’s contingent consideration:

1 unchanged sentence

(in thousands)

Nine Months Ended September 30, 2020 $ 2,953 $ 348 $ 3,301

Nine Months Ended September 30, 2019 $ 3,126 $ ( 121 ) $ 3,005

Three Months Ended March 31, 2021 $ 3,426 $ 129 $ 3,555

Three Months Ended March 31, 2020 $ 2,953 $ 112 $ 3,065

Investments in marketable securities

2 unchanged sentences

Gross Unrealized Loss (1)

As of September 30, 2020 (in thousands)

As of March 31, 2021 (in thousands)

Cash equivalents

3 unchanged sentences

US government agency bonds $ 4,043 $ 1 $ — $ 4,044

US treasury bills 15,996 3 — 15,999

US government bonds 32,484 13 — 32,497

6 unchanged sentences

US government money market fund $ 13,703 $ — $ — $ 13,703

US government agency bonds 1,511 — — 1,511

US treasury bills 2,000 — — 2,000

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(1) Gross unrealized gain (loss) is pre-tax and is reported in other comprehensive loss.

The contractual term to maturity of the $ 21.4 million of short-term marketable securities held by the Company as of September 30, 2020 is less than one year.

The contractual term to maturity of the $ 52.5 million of marketable securities held by the Company as of March 31, 2021 is less than one year.

As of December 31, 2020, the Company’s $ 71.0 million of marketable securities also had contractual maturities of less than one year.

There were no realized gains or losses for the three and nine months ended September 30, 2020 or 2019.

There were no realized gains or losses for the three months ended March 31, 2021 or 2020.

Investment in Genevant

In April 2018, Arbutus entered into an agreement with Roivant Sciences Ltd.

In April 2018, the Company entered into an agreement with Roivant Sciences Ltd.

(“Roivant”), its largest shareholder, to launch Genevant Sciences Ltd.

(“Genevant”), a company focused on the discovery, development, and commercialization of a broad range of RNA-based therapeutics enabled by Arbutus’ lipid nanoparticle (“LNP”) and ligand conjugate delivery technologies.

Arbutus licensed exclusive rights to its LNP and ligand conjugate delivery platforms to Genevant for RNA-based applications outside of HBV, except to the extent certain rights had already been licensed to other third parties.

Arbutus retained all rights to its LNP and conjugate delivery platforms for HBV.

Arbutus is entitled to receive tiered low single-digit royalties on future sales of Genevant products covered by the licensed patents.

If Genevant sub-licenses the intellectual property licensed by Arbutus to Genevant, Arbutus would receive upon the commercialization of a product developed by such sub-licensee the lesser of (i) twenty percent of the revenue received by Genevant for such sublicensing and (ii) tiered low single-digit royalties on product sales by the sublicensee.

On July 23, 2020, the United States Patent and Trademark Office before the Patent Trial and Appeal Board ("PTAB") announced their decision in Moderna Therapeutics, Inc.'s challenge of the validity of U.S.

Patent 8,058,069 ("the '069 Patent").

In this decision, the PTAB determined no challenged claims were unpatentable.

While Arbutus is the patent holder, this patent has been licensed to Genevant.

The '069 Patent was included in the license agreement between Genevant and Arbutus.

On July 31, 2020, Genevant was recapitalized through an equity investment and conversion of previously issued convertible debt securities held by Roivant.

In addition, Arbutus participated in the recapitalization of Genevant with an investment of $ 2.5 million.

Arbutus determined that this $ 2.5 million additional investment in Genevant represented the funding of prior losses and accordingly, the Company recorded the amount as an equity investment loss on the Condensed Consolidated Statements of Operations and Comprehensive Loss during the three months ended September 30, 2020.

Following the recapitalization, Arbutus owned approximately 16 % of the common equity of Genevant.

In connection with the recapitalization, Genevant, Arbutus and Roivant entered into an Amended and Restated Shareholders Agreement that provides Roivant with substantial control of Genevant.

Arbutus has a non-voting observer seat on Genevant’s Board of Directors.

Due to Arbutus’ loss of significant influence with respect to Genevant as a result of the recapitalization, Arbutus discontinued the use of the equity method of accounting for its interest in Genevant.

Following the recapitalization, Arbutus accounts for its interest in Genevant as equity securities without readily determinable fair values.

(“Genevant”), a company focused on the discovery, development, and commercialization of a broad range of RNA-based therapeutics enabled by the Company’s lipid nanoparticle (“LNP”) and ligand conjugate delivery technologies.

The Company licensed exclusive rights to its LNP and ligand conjugate delivery platforms to Genevant for RNA-based applications outside of HBV, except to the extent certain rights had already been licensed to other third parties (the “Genevant License”).

The Company retained all rights to its LNP and conjugate delivery platforms for HBV.

Under the Genevant License, the Company is entitled to receive tiered low single-digit royalties on future sales of Genevant products covered by the licensed patents.

If Genevant sub-licenses the intellectual property licensed by the Company to Genevant, the Company is entitled to receive under the Genevant License, upon the commercialization of a product developed by such sub-licensee, the lesser of (i) twenty percent of the revenue received by Genevant for such sublicensing and (ii) tiered low single-digit royalties on product sales by the sublicensee.

On July 31, 2020, Roivant recapitalized Genevant through an equity investment and conversion of previously issued convertible debt securities held by Roivant.

In addition, the Company participated in the recapitalization of Genevant with an investment of $ 2.5 million.

The Company determined that this $ 2.5 million additional investment in Genevant represented the funding of prior losses and accordingly, the Company recorded the amount as an equity investment loss on the Condensed Consolidated Statements of Operations and Comprehensive Loss in 2020.

Following the recapitalization, the Company owned approximately 16 % of the common equity of Genevant.

In connection with the recapitalization, Genevant, the Company and Roivant entered into an Amended and Restated Shareholders Agreement that provides Roivant with substantial control of Genevant.

The Company has a non-voting observer seat on Genevant’s Board of Directors.

Due to the Company’s loss of significant influence with respect to Genevant as a result of the recapitalization, the Company discontinued the use of the equity method of accounting for its interest in Genevant.

Following the recapitalization, the Company accounts for its interest in Genevant as equity securities without readily determinable fair values.

Accordingly, an estimate of the fair value of the securities is based on the original cost less previously recognized equity method losses, less impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or a similar Genevant securities.

As of September 30, 2020, the carrying value of Arbutus’ investment in Genevant was zero and Arbutus owned approximately 16 % of the common equity of Genevant.

Arbutus’ entitlement to receive future royalties or sublicensing revenue from Genevant was not impacted by the recapitalization.

The Company’s entitlement to receive future royalties or sublicensing revenue under the Genevant License was not impacted by the recapitalization.

As of March 31, 2021, the carrying value of the Company’s investment in Genevant was zero and the Company owned approximately 16 % of the common equity of Genevant.

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities are comprised of the following:

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(in thousands)

3 unchanged sentences

Payroll accruals 896 3,566

Site consolidation accrual — 137

Other accrued liabilities 10 9

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Sale of future royalties

On July 2, 2019, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with the Ontario Municipal Employees Retirement System (or “OMERS”), pursuant to which the Company sold to OMERS part of its royalty interest on future global net sales of ONPATTRO® (Patisiran) (“ONPATTRO”), an RNAi therapeutic currently being sold by Alnylam Pharmaceuticals, Inc.

ONPATTRO utilizes Arbutus’ LNP technology, which was licensed to Alnylam pursuant to the Cross-License Agreement, dated November 12, 2012, by and between the Company and Alnylam (the “LNP License Agreement”).

On July 2, 2019, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with the Ontario Municipal Employees Retirement System (“OMERS”), pursuant to which the Company sold to OMERS part of its royalty interest on future global net sales of ONPATTRO ® (Patisiran) (“ONPATTRO”), an RNA interference therapeutic currently being sold by Alnylam Pharmaceuticals, Inc.

ONPATTRO utilizes the Company’s LNP technology, which was licensed to Alnylam pursuant to the Cross-License Agreement, dated November 12, 2012, by and between the Company and Alnylam (the “LNP License Agreement”).

Under the terms of the LNP License Agreement, the Company is entitled to tiered royalty payments on global net sales of ONPATTRO ranging from 1.00 % to 2.33 % after offsets, with the highest tier applicable to annual net sales above $ 500 million.

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OMERS will retain this entitlement until it has received $ 30 million in royalties, at which point 100 % of such royalty interest on future global net sales of ONPATTRO will revert to the Company.

OMERS has assumed the risk of collecting up to $ 30 million of future royalty payments from Alnylam and Arbutus is not obligated to reimburse OMERS if they fail to collect any such future royalties.

The $ 30 million in royalties to be collected by OMERS is accounted for as a liability, with the difference between the liability and the gross proceeds received accounted for as a discount.

OMERS has assumed the risk of collecting up to $ 30 million of future royalty payments from Alnylam and the Company is not obligated to reimburse OMERS if they fail to collect any such future royalties.

The $ 30 million in royalties to be paid to OMERS is accounted for as a liability, with the difference between the liability and the gross proceeds received accounted for as a discount.

The discount, as well as $ 1.5 million of transaction costs, will be amortized as interest expense based on the projected balance of the liability as of the beginning of each period.

Over the course of the Agreement, the actual interest rate will be affected by the amount and timing of royalty revenue recognized and changes in the timing of forecasted royalty revenue.

As of March 31, 2021, the Company estimated an effective annual interest rate of approximately 16 %.

Over the course of the Agreement, the actual interest rate will be affected by the amount and timing of royalty revenue recognized and changes in the timing of

forecasted royalty revenue.

On a quarterly basis, the Company will reassess the expected timing of the royalty revenue, recalculate the amortization and effective interest rate and adjust the accounting prospectively as needed.

As of September 30, 2020, the effective annual interest rate was approximately 22 %.

The Company will recognize non-cash royalty revenue related to the sales of ONPATTRO during the term of the Agreement.

As royalties are remitted to OMERS from Alnylam, the balance of the recognized liability will be effectively repaid over the life of the Agreement.

From the inception of the royalty sale through September 30, 2020, the Company has recorded an aggregate of $ 3.7 million of non-cash royalty revenue for royalties earned by OMERS.

The Company recognizes non-cash royalty revenue related to the sales of ONPATTRO during the term of the Agreement.

As royalties are remitted to OMERS from Alnylam, the balance of the recognized liability is effectively repaid over the life of the Agreement.

From the inception of the royalty sale through March 31, 2021, the Company has recorded an aggregate of $ 6.0 million of non-cash royalty revenue for royalties earned by OMERS.

There are a number of factors that could materially affect the amount and timing of royalty payments from Alnylam, none of which are within the Company’s control.

During the three and nine months ended September 30, 2020, the Company recognized non-cash royalty revenue of $ 0.7 million and $ 2.0 million, respectively, and $ 1.1 million and $ 3.2 million of related non-cash interest expense, respectively.

During the three and nine months ended September 30, 2019, the Company recognized non-cash royalty revenue of $ 0.5 million and $ 1.0 million, respectively, and $ 1.1 million of related non-cash interest expense during the three and nine months ended September 30, 2019.

The table below shows the activity related to the net liability for 2020:

Nine Months Ended September 30, 2020

The table below shows the activity related to the net liability for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

(in thousands)

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Contingencies and commitments

Product development partnership with the Canadian Government

The Company entered into a Technology Partnerships Canada (“TPC”) agreement with the Canadian Federal Government on November 12, 1999.

Under this agreement, TPC agreed to fund 27 % of the costs incurred by the Company, prior to March 31, 2004, in the development of certain oligonucleotide product candidates up to a maximum contribution from TPC of $ 7.2 million (C$ 9.3 million).

The Company received a cumulative contribution of $ 2.7 million (C$ 3.7 million).

In return for the funding provided by TPC, the Company agreed to pay royalties on the share of future licensing and product revenue, if any, that is received by the Company on certain non-RNAi oligonucleotide product candidates covered by the funding under the agreement.

These royalties are payable until a certain cumulative payment amount is achieved or until a pre-specified date.

In addition, until a cumulative amount equal to the funding actually received under the agreement has been paid to TPC, the Company agreed to pay 2.5 % royalties on any royalties the Company receives on sales of Acrotech Biopharma LLC’s Marqibo® (formerly Spectrum Pharmaceuticals, Inc.).

For each of the nine months ended September 30, 2020 and 2019, the Company earned royalties on Marqibo sales in the amount of $ 0.2 million.

The resulting royalties payable by the Company to TPC were not material in either period.

The cumulative amount paid or accrued up to September 30, 2020 was less than $ 0.1 million, resulting in the contingent amount due to TPC being $ 2.7 million (C$ 3.7 million).

Arbitration with the University of British Columbia

Certain early work on lipid nanoparticle delivery systems and related inventions was undertaken at the University of British Columbia (“UBC”), as well as by the Company that was subsequently assigned to UBC.

These inventions are licensed to the Company by UBC under a license agreement, initially entered into in 1998 and amended in 2001, 2006 and 2007.

These inventions are licensed to the Company by UBC under a license agreement, initially entered into in 1998 and as amended in 2001, 2006 and 2007.

The Company has granted sublicenses under the UBC license to certain third parties, including Alnylam.

In November 2014, UBC filed a demand for arbitration against the Company and in January 2015, filed a Statement of Claim, which alleged entitlement to $ 3.5 million in allegedly unpaid royalties based on publicly available information, and an unspecified amount based on non-public information.

UBC also sought interest and costs, including legal fees.

The Company filed its Statement of Defense to UBC’s Statement of Claims, as well as a Counterclaim involving a patent application that the Company alleged UBC wrongly licensed to a third party.

The proceedings were divided into three phases, with the first hearing taking place in June 2017.

In the first phase, the arbitrator determined which agreements are sublicense agreements within UBC’s claim.

Also in the first phase, UBC updated its alleged entitlement from $ 3.5 million originally claimed to seek $ 10.9 million in alleged unpaid royalties, plus interest arising from payments as early as 2008.

The arbitrator also held in the first phase of the arbitration that the patent application that is the subject of the Counterclaim was not required to be licensed to the Company.

The second phase of the arbitration took place in the second quarter of 2019.

In August 2019, the arbitrator issued his decision for the second phase of the arbitration, awarding UBC $ 5.9 million, which includes interest of approximately $ 2.6 million.

The Company paid the $ 5.9 million award to UBC in September 2019.

The arbitrator also held that the third phase of the arbitration, which would address patent validity, should the Company choose to pursue a third phase, would not provide a defense to the award.

An award for costs and attorneys’ fees is still to be determined.

The Company has accrued $ 0.4 million for an estimate of a potential award for costs and attorneys’ fees as of September 30, 2020.

In November 2014, UBC filed a demand for arbitration against the Company which alleged entitlement to unpaid royalties.

In August 2019, the arbitrator issued his decision for the second phase of the arbitration, awarding UBC $ 5.9 million, which included interest of approximately $ 2.6 million.

The Company paid the $ 5.9 million award to UBC in September 2019 and paid an additional $ 0.2 million award for costs and attorneys’ fees in March 2021, and this matter is now fully resolved.

On December 18, 2020, UBC delivered to the Company a notice of arbitration alleging that under the cross license between UBC and Arbutus, it is due royalties of $ 2.0 million plus interest arising from the Company’s sale to OMERS of part of its royalty interest on future global net sales of ONPATTRO, currently being sold by Alnylam.

Oral hearings for this matter are currently scheduled to begin on April 25, 2022.

The Company does not believe that any royalties are due to UBC and the Company intends to vigorously contest UBC’s allegation.

Stock Purchase Agreement with Enantigen

In October 2014, Arbutus Inc., our wholly-owned subsidiary, acquired all of the outstanding shares of Enantigen Therapeutics, Inc.

In October 2014, Arbutus Inc., the Company’s wholly-owned subsidiary, acquired all of the outstanding shares of Enantigen Therapeutics, Inc.

(“Enantigen”) pursuant to a stock purchase agreement.

Through this transaction, Arbutus Inc.

acquired an HBV surface antigen secretion inhibitor program and a capsid assembly inhibitor program.

Under the stock purchase agreement, Arbutus Inc.

agreed to pay up to a total of $ 21.0 million to Enantigen’s selling stockholders upon the achievement of specified development and regulatory milestones for (a) the first two products that contain either a capsid compound or an HBV surface antigen compound that is covered by a patent acquired under this agreement, or (b) a capsid compound from an agreed upon list of compounds.

The development milestones are tied to programs which are no longer under development by the Company, and therefore the contingency related to these milestones has been reduced to zero .

An additional $ 102.5 million may also be paid to Enantigen’s selling stockholders related to the achievement of certain sales performance milestones in connection with the sale of the first commercialized product by Arbutus Inc.

for the treatment of HBV, regardless of whether such product is based upon assets acquired under this agreement, and a low single-digit royalty on net sales of such first commercialized HBV product, up to a maximum royalty payment of $ 1.0 million that, if paid, would be offset against Arbutus Inc.’s milestone payment obligations.

The contingent consideration for this acquisition is a financial liability, which is measured at its fair value at each reporting period, with any changes in fair value from the previous reporting period recorded in the statements of operations and comprehensive loss (see note 3).

The fair value of the contingent consideration was $ 3.3 million as of September 30, 2020.

The amount paid to Enantigen’s selling shareholders could be up to an additional $ 102.5 million in sales performance milestones in connection with the sale of the first commercialized product by the Company for the treatment of HBV, regardless of whether such product is based upon assets acquired under this agreement, and a low single-digit royalty on net sales of such first commercialized HBV product, up to a maximum royalty payment of $ 1.0 million that, if paid, would be offset against the Company’s milestone payment obligations.

Certain other development milestones related to the acquisition were tied to programs which are no longer under development by the Company, and therefore the contingency related to those development milestones is zero .

The contingent consideration is a financial liability and is measured at its fair value at each reporting period, with any changes in fair value from the previous reporting period recorded in the statements of operations and comprehensive loss (see note 3).

The fair value of the contingent consideration was $ 3.6 million as of March 31, 2021.

Collaborations, contracts and licensing agreements

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Assembly Biosciences, Inc.

In August 2020, the Company and Assembly BioSciences, Inc.

(“Assembly”) entered into a clinical collaboration agreement to evaluate the Company’s proprietary GalNAC delivered RNAi therapeutic AB-729 in combination with Assembly’s lead HBV core inhibitor (capsid inhibitor) candidate vebicorvir and a standard-of-care nucleos(t)ide reverse transcriptase inhibitor (Nrtl) therapy for the treatment of patients with chronic HBV infection.

The companies will share in the costs of the collaboration and the associated clinical trial is projected to initiate in the first half of 2021.

The Company incurred no costs related to the collaboration during the three months ended September 30, 2020.

In August 2020, the Company entered into a clinical collaboration agreement with Assembly to evaluate AB-729 in combination with Assembly’s lead HBV core inhibitor (capsid inhibitor) candidate vebicorvir (“VBR”) and standard-of-care NA therapy for the treatment of subjects with chronic HBV infection.

The Company and Assembly will share in the costs of the collaboration.

The Company incurred $ 0.8 million of costs related to the collaboration during the three months ended March 31, 2021 and reflected those costs in research and development in the statement of operations and comprehensive loss.

Except to the extent necessary to carry out Assembly’s responsibilities with respect to the collaboration trial, the Company has not provided any license grant to Assembly for use of its AB-729 compound.

X-Chem and Proteros

In March 2021, the Company, X-Chem, Inc.

(“X-Chem”) and Proteros biostructures GmbH (“Proteros”) entered into a discovery research and license agreement focused on the discovery of novel inhibitors targeting the SARS-CoV-2 nsp5 main protease (M pro ).

The agreement is designed to accelerate the development of pan-coronavirus agents to treat COVID-19 and potential future coronavirus outbreaks.

This collaboration brings together the Company’s expertise in the discovery and development of antiviral agents with X-Chem’s industry leading DNA-encoded library (DEL) technology and Proteros’ protein sciences, biophysics and structural biology capabilities and provides important synergies to potentially identify safe and effective therapies against coronaviruses including SARS-CoV-2.

The collaboration is expected to allow for the rapid screening of one of the largest small molecule libraries against M pro (an essential protein required for the virus to replicate itself) and the use of state-of-the-art structure guided methods to rapidly optimize M pro inhibitors, which the Company could potentially progress to clinical candidates.

The agreement provides for payments by the Company to X-Chem and Proteros upon satisfaction of certain development, regulatory and commercial milestones, as well as royalties on sales.

Alnylam Pharmaceuticals, Inc.

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Revenues are summarized in the following table:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

(in thousands) (in thousands)

Three Months Ended March 31,

(in thousands)

Revenue from collaborations and licenses

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$ 1,095 $ 753

Gritstone Oncology, Inc.

— 1,722 — 1,789

Other milestone and royalty payments 59 82

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Alnylam Pharmaceuticals, Inc.

695 461 2,041 979

Total revenue $ 2,113 $ 1,491

Stockholders’ equity

Open Market Sales Agreement

In December 2018, the Company entered into an Open Market Sale Agreement with Jefferies LLC (“Jefferies”) (the “Sale Agreement”), under which it could issue and sell common shares, from time to time, for an aggregate sales price of up to $ 50.0 million.

In December 2019, the Company entered into an amendment to the Sale Agreement with Jefferies (the “2019 Amendment”) in connection with the filing of a shelf registration statement on Form S-3 (File No.

Open Market Sale Agreement

The Company has an Open Market Sale Agreement (the “Sale Agreement”) with Jefferies LLC (“Jefferies”) dated December 20, 2018, as amended on December 20, 2019 (the “2019 Amended Sale Agreement”), under which it may issue and sell common shares, from time to time, under a shelf registration statement on Form S-3 (File No.

333-235674), filed with the SEC on December 23, 2019 (the “2019 Shelf Registration Statement”).

The 2019 Amendment revised the original Sale Agreement to reflect that the Company could sell its common shares, without par value, from time to time, for an aggregate sales price of up to $ 50 million, under the Shelf Registration Statement.

In July 2020, the Company fully utilized the remaining availability under the Sale Agreement, as amended by the 2019 Amendment.

In August 2020, the Company entered into a new amendment to the Sale Agreement (the “2020 Amendment”) with Jefferies.

Pursuant to the 2020 Amendment, the Company can issue and sell common shares, from time to time, for an aggregate sales price of up to $ 75 million under the Sale Agreement, as amended.

For the nine months ended September 30, 2019, the Company issued 1,208,090 common shares pursuant to the Sale Agreement resulting in net proceeds of approximately $ 5.2 million.

There were no shares issued under the Sale Agreement during the three months ended September 30, 2019.

During the three and nine months ended September 30, 2020, the Company issued 13,258,096 and 19,696,361 common shares pursuant to the Sale Agreement, as amended, resulting in net proceeds of approximately $ 48.8 million and $ 66.1 million, respectively.

As of September 30, 2020, there was approximately $ 62.3 million available under the Sale Agreement, as amended.

In July 2020, the Company fully utilized the remaining availability under the 2019 Amended Sale Agreement.

In August 2020, the Company entered into an amendment to the 2019 Amended Sale Agreement (as amended, the “2020 Amended Sale Agreement”) with Jefferies, whereby the Company may issue and sell common shares, from time to time, for an aggregate sales price of up to $ 75 million, under the 2019 Shelf Registration Statement.

On August 7, 2020, the Company filed a prospectus supplement with the SEC (the “August 2020 Prospectus Supplement”) under the 2019 Shelf Registration Statement in connection with the offering of up to an additional $ 75 million of its common shares pursuant to the 2020 Amended Sale Agreement.

The Company filed a new shelf registration statement on Form S-3 (File No.

333-248467) with the SEC on August 28, 2020 (the “2020 Shelf Registration Statement”).

On March 4, 2021, the Company entered into an amendment to the 2020 Amended Sale Agreement with Jefferies to reflect that the Company may issue and sell additional common shares from time to time without a cap on the aggregate sales price (as amended, the “2021 Amended Sale Agreement”).

Also, on March 4, 2021, the Company filed a prospectus supplement with the SEC (the “March 2021 Prospectus Supplement”) in connection with the offering of up to an additional $ 75.0 million of its common shares pursuant to the 2021 Amended Sale Agreement under the 2020 Shelf Registration Statement.

During the three months ended March 31, 2021, the Company issued 6,395,780 common shares pursuant to the 2020 Amended Sale Agreement, resulting in net proceeds of approximately $ 26.4 million.

For the three months ended March 31, 2020, the Company issued 4,147,081 common shares pursuant to the 2019 Amended Sale Agreement, resulting in net proceeds of approximately $ 12.3 million.

As of March 31, 2021, there was approximately $ 14.2 million available under the August 2020 Prospectus Supplement and $ 75.0 million available under the March 2021 Prospectus Supplement.

Stock-based compensation

The table below summarizes information about the Company’s stock based compensation for the three and nine months ended September 30, 2020 and 2019 and the expense recognized in the condensed consolidated statements of operations:

Three Months Ended September 30, 2020 Three Months Ended September 30, 2019 Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019

The table below summarizes information about the Company’s stock based compensation for the three months ended March 31, 2021 and 2020 and the expense recognized in the condensed consolidated statements of operations:

Three Months Ended March 31,

(in thousands, except share and per share data)

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Weighted average exercise price $ 4.33 $ 3.35

Stock compensation expense

Research and development $ 840 $ 853

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Total stock compensation expense $ 1,635 $ 1,445

Awards with performance conditions are expensed when it is probable that the performance condition will be achieved.

For each of the three and nine months ended September 30, 2020, $ 0.3 million was expensed for stock option awards with performance conditions.

These expenses are included in the table above.

Employee Stock Purchase Plan

In May 2020, the Company’s stockholders approved the 2020 Employee Stock Purchase Plan which became effective on May 28, 2020.

A total of 1.5 million common shares were reserved for issuance under the ESPP.

Company employees contribute funds via payroll deductions, which are used to buy Company common shares at a discount of up to 15 % based on the lower of the price at the start of the offering period and at the end of the relevant purchase period within such offering period.

The initial offering period under the ESPP is September 1, 2020 through August 31, 2021 with purchase dates set on February 26, 2021 and August 31, 2021.

All 1.5 million common shares remained available for future issuance under the plan at September 30, 2020.

For the three and nine months ended September 30, 2020, the Company recognized less than $ 0.1 million of stock-based compensation expense related to the ESPP, which is included in the table above.

Series A Preferred Shares

In October 2017, the Company entered into a subscription agreement with Roivant for the sale of 1,164,000 Preferred Shares for gross proceeds of $ 116.4 million.

These Preferred Shares are non-voting and accrue an 8.75 % per annum coupon in the form of additional Preferred Shares, compounded annually, until October 16, 2021, at which time all the Preferred Shares will be subject to mandatory conversion into common shares (subject to limited exceptions in the event of certain fundamental corporate transactions relating to Arbutus’s capital structure or assets, which would permit earlier conversion at Roivant’s option).

The conversion price is $ 7.13 per share, which will result in the Preferred Shares being converted into approximately 23 million common shares.

After conversion of the Preferred Shares into common shares, based on the number of common shares outstanding as of September 30, 2020, Roivant will hold approximately 36 % of the Company’s common shares.

Roivant agreed to a four year lock-up period for this investment and its existing holdings in the Company.

Roivant also agreed to a four year standstill whereby Roivant will not acquire greater than 49.99 % of the Company’s common shares or securities convertible into common shares.

The initial investment of $ 50.0 million closed in October 2017, and the remaining amount of $ 66.4 million closed in January 2018 following regulatory and shareholder approvals.

The Company records the Preferred Shares wholly as equity under ASC 480, Distinguishing Liabilities From Equity, with no bifurcation of the conversion feature from the host contract, given that the Preferred Shares cannot be cash settled and the redemption features are within the Company’s control, which include a fixed conversion ratio with predetermined timing and proceeds.

The Company accrues for the 8.75 % per annum compounding coupon at each reporting period end date as an increase to preferred share capital, and an increase to deficit (see Condensed Consolidated Statement of Stockholders’ Equity).

On October 2, 2017, the Company announced that it entered into a subscription agreement with Roivant for the sale of Preferred Shares to Roivant for gross proceeds of $ 116.4 million.

The Preferred Shares are non-voting and are convertible into common shares at a conversion price of $ 7.13 per share (which represents a 15 % premium to the closing price of $ 6.20 per share).

The purchase price for the Preferred Shares plus an amount equal to 8.75 % per annum, compounded annually, will be subject to mandatory conversion into approximately 23 million common shares on October 18, 2021 (subject to limited exceptions in the event of certain fundamental corporate transactions relating to the Company’s capital structure or assets, which would permit earlier conversion at Roivant’s option).

Assuming conversion of the Preferred Shares into common shares, based on the number of common shares outstanding on March 31, 2021 Roivant would hold 32 % of the Company’s common shares.

Roivant has agreed to a four year lock-up period for this investment and its existing holdings in the Company.

Roivant has also agreed to a four year standstill whereby Roivant will not acquire greater than 49.99 % of the Company’s common shares or securities convertible into common shares.

Both the lockup and standstill periods expire on October 18, 2021.

Following the expiration of the standstill period, Roivant will no longer be contractually prohibited from acquiring control of the Company.

The initial investment of $ 50.0 million closed on October 16, 2017, and the remaining amount of $ 66.4 million closed on January 12, 2018 following regulatory and shareholder approvals.

The Company records the Preferred Shares wholly as equity with no bifurcation of the conversion feature from the host contract, given that the Preferred Shares cannot be cash settled and the redemption features are within the Company’s control, which include a fixed conversion ratio with predetermined timing and proceeds.

The Company accrues for the 8.75 % per annum compounding coupon at each reporting period end date as an increase to preferred share capital, and an increase to deficit (see statement of stockholders’ equity).

Related party transactions

On July 31, 2020, Genevant was recapitalized through an equity investment and conversion of previously issued convertible debt securities held by Roivant.

In addition, Arbutus participated in the recapitalization with an investment of $ 2.5 million.

Following the recapitalization, Arbutus owned approximately 16 % of the common equity of Genevant.

See note 5 for more information.

Through the first quarter of 2019, the Company purchased certain research and development services from Genevant.

These services were billed at agreed hourly rates and were reflective of market rates for such services.

The total cost of these services during 2019 was less than $ 0.1 million, which was included in the Condensed Consolidated Statement of Operations under research and development.

There were no such costs incurred during 2020.

Conversely, Genevant purchased certain administrative and transitional services from the Company totaling less than $ 35 thousand for each of the three and nine months ended September 30, 2020.

The total income from these services was $ 40 thousand and $ 284 thousand for the three and nine months ended September 30, 2019.

This income is netted against research and development expenses in the condensed consolidated statements of operations.

In addition, during 2019 Genevant had a sublease for 17,900 square feet in the Company’s Burnaby facility.

Sublease income from Genevant was $ 21 thousand and $ 145 thousand for the three and nine months ended September 30, 2019, and was netted against site consolidation costs and lease liability.

The Company’s Burnaby facility lease and the corresponding sublease to Genevant expired on July 31, 2019.

During the three months ended March 31, 2021 and 2020, Genevant purchased certain administrative services from the Company.

Income from these services was less than $ 0.1 million in both periods and is netted against research and development expenses in the condensed consolidated statements of operations.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements